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Family Dollar Stores (FDO) Earnings Flat, Cuts Guidance Amid Margin Pressure

 January 03, 2013 07:24 AM

(By Balachander) Family Dollar Stores Inc. (NYSE: FDO) reduced its full-year forecast after the operator of self-service retail discount stores posted flat quarterly earnings amid contraction of margins due to stronger sales of lower-margin consumables.

The Matthews, North Carolina-based company also issued downbeat guidance for the second quarter, and its shares retreated 4.90 percent in premarket trading on Thursday.

Net income was nearly unchanged at about $80.3 million for the first quarter. On a per share basis, earnings increased to 69 cents from 68 cents, missing market expectations of 75 cents.

Sales rose 12.7 percent to $2.42 billion, beating market expectations of a growth of 10.80 percent. Comparable store sales gained 6.6 percent amid increase in customer traffic and higher average customer transaction value.

[Related -Family Dollar Stores, Inc. (FDO): More Headwinds Than Tailwinds In Near-Term]

Gross margin contracted to 34.1 percent from 35.3 percent in the same period of last year.

"Early results from our sales-driving initiatives exceeded our expectations in the first quarter, resulting in more gross margin pressure than anticipated," commented CEO Howard Levine. "This mix pressure, combined with expected headwinds from insurance expense, resulted in earnings that were at the low end of our guidance."

Looking ahead for the second quarter, Family Dollar forecasts EPS between $1.18 and $1.28, on comparable store sales growth in the range of 4 percent to 5 percent. Analysts expect EPS of $1.39 on sales of $2.89 billion.

[Related -Family Dollar Stores, Inc. (NYSE:FDO) Q1 Earnings Preview: What To Watch?]

"The holiday selling season proved to be more challenging than we expected as customers faced increasing financial uncertainty," said Levine. "Discretionary categories continued to be pressured, reflecting ongoing consumer caution."

In the month of December, Family Dollar said comparable stores sales grew around 2.5 percent, helped primarily by strong, double-digit sales of consumables.

For the full year 2013, the company currently expects EPS in the range of $3.95 to $4.20, lower than prior view of $4.10 to $4.40.

Family Dollar continues to forecast comparable store sales to increase between 4 percent and 6 percent and expects pressure on gross margins mainly due to an expanding mix of lower-margin consumables.

For the preceding fourth quarter, the company earned $0.75 a share on sales of $2.36 billion.

The stock, which has been trading between $53.03 and $74.73 over the past year, closed Wednesday's regular trading at $64.04.

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